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The Time of Reckoning for Gold and Gold Miners is Coming

onNovember 8, 2012

Klaudius Sobczyk, Managing Director of Advanced Dynamic Asset Management GmbH. This article follows up on the one of the 18th September by the same author.

The recent developments in the price of gold change the positive tendency which appeared to have developed just few weeks ago. Equity markets and gold rallied from interim lows in late summer and gold reached an initial target of 1.800 USD. This appears to have been a level at which gold tended to reverse or once taken rally strongly. The consolidation has begun with an interesting caveat.

Risk markets which can be broadly defined as gold, equities and Euro were driven through the year by political developments particularly in Europe. Through the summer and 3Q 2012 ECB embarked on a continuous verbal QE expansion. There has been a lot of talk about the unlimited monetary expansion. The banking union has been created and the peripheral bonds particularly in Italy and Spain rallied. Those developments supported the risk rally in equities and gold. However, suddenly the developments have changed.

Slowly but gradually all those efforts faded and there is only very little political support or ECB chatter. The recent economic news is rather encouraging but as few observers remarked the positive economic development it taking away the punch bowl from the market. If economy is doing well further liquidity injections are not necessary. The economy could sustain its improvement without central banks’ intervention. This is where the issues begin.

Gold price loves the liquidity expansion. When the expectations of continuous liquidity flood are diminishing so do the expectations for further gold price rise. Gold appears to be locked in a consolidation range which is playing out in the range between 1500 and 1800 USD. See the following chart.

Gold daily in USD

Source: Bloomberg

Gold had a very rocky ride. The large outside day which occurred on 6. November offered an extremely interesting level for a new support level. Usually such reversals in the thin-air do not occur often. There must have been a very powerful surge in busing activity not only based on the elections though elections are a good excuse. Now the chances increase that the consolidating pattern which lasted a year could be finally broken. 1700 may still be important but I would rather look at 1675 or the rising support line as seen in the chart.

The gold price has obviously a direct effect on the gold mining sector which tried to rally hard but failed over the recent weeks, as the equity rally faded out and the gold price stagnated. The gold mining stocks are still looking for support which appears to be building around the breakout levels.

NYSE Arca Exchange Gold BUGS Index daily in USD

Source: Bloomberg

If the supports hold there could be nice revival in the gold miners. Suggested tactics are: a first stop for defensive positioning would be 471, which was retested twice over last week. The bigger and more pronounced level would be the double bottom breakout level of 461. The current pattern would be accomplished on the upside if we break above 503 at the moment. This level changes daily and declines over time.